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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee required)
For the fiscal year ended December 31, 1996,
or
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from to
Commission file number 0-3035
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 830-3400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, par value $0.20 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1997:
Common Stock, par value $0.20 per share -- $16,438,000
The number of shares outstanding of each of the issuer's classes of common
stock as of March 1, 1997
Common Stock, par value $0.20 per share -- 3,484,073 shares
Documents incorporated by reference: Portions of the Proxy Statement for the
annual meeting of stockholders to be held on May 8, 1997, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
PART I
Item Page
1. Business 3
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 6
Executive Officers of the Company 7
PART II
5. Market for Company's Common Equity and Related Stockholder Matters 9
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
8. Financial Statements and Supplementary Data 12
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 28
PART III
10. Directors and Executive Officers of the Company 29
11. Executive Compensation 29
12. Security Ownership of Certain Beneficial Owners and Management 29
13. Certain Relationships and Related Transactions 29
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 29
McIAS is a trademark of Cognitronics Corporation.
UNIX is a registered trademark of Santa Cruz Operation, Inc.
DART is a registered trademark of Dacon Electronics Corp., a subsidiary of
Cognitronics Corporation.
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PART I
Item 1. Business
(a) Cognitronics Corporation (the "Company") was incorporated in January
1962 under the laws of the State of New York. The Company designs,
manufactures and markets voice processing systems.
(b) The Company operates in one industry segment: voice processing
products.
(c) (i) A description of the fields of voice processing in which the
Company operates and its products are as follows:
Passive Announcers. These announcers are used by the telephone operating
companies to inform callers about network conditions or procedures. The
Company has been a major supplier to telephone companies of passive
announcers, such as the Company's Speech Recorder/Announcer , Automatic Number
Announcer and the McIAS(TM) 1500. The McIAS 950, introduced in 1995, is
also capable of use as a passive announcer. These products are generally sold
to telephone companies directly.
Intelligent Announcers. The Company's McIAS 1100 and 2100 have been
primarily used by the telephone companies to provide voice announcements in
connection with custom calling features (CLASS), such as selective call
forwarding and caller originator trace. Number change intercept is another
important feature provided.
Introduced in 1994, a new generation of central office grade systems
became available. Known as the McIAS 16xx series, two models (McIAS 1607 and
1610/68) provide a range of capacity and a flexible voice platform which
delivers enhanced features to the telephone network. Features include all
those provided by the Company's earlier products as well as partitioning for
multiple end users, music on hold, message on hold and Centrex ACD
announcements. The Company's sales effort was to sell this equipment into new
installations, and to transition existing customers from the McIAS 1100 and
2100 to these new products. In 1996, the Company ceased production of the
McIAS 1100 and 2100.
Introduced in the first quarter of 1995 were the McIAS 950 and 1685, and
UNIX® based versions of the McIAS 16xx, named McIAS 16xx/IP. A new, larger
capacity member of the product family, McIAS 1623/IP, was introduced in
October 1995. The McIAS 950 and 1685 are fixed application systems designed to
deliver important features to the market at low price points. The UNIX, RISC
CPU-powered McIAS 16xx/IP series provides the ability to run multiple
applications for multiple users simultaneously. Application examples include,
or will include, number change with call completion, automated attendant,
interactive voice response, fax, voice mail, voice activated dialing, prepaid
debit card, audiotex, a graphical service creation environment and a number
of application programming interfaces (APIs). All earlier installations of the
McIAS 16xx series are fully upgradable to the UNIX version. A continuing
evolution of these products can be expected in 1997. Additionally, a new
digital interface card is planned for introduction later in 1997. This new
card will utilize the robust VMEbus architecture and will further enhance the
Company's ability to deliver the scalable, advanced functionality required in
the Advanced Intelligent Network (AIN). The Company believes that this
technology will provide for a successful entry into the Intelligent Peripheral
and wireless markets.
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Call Processing Systems. The Company's McIAS 950 is also an automated
attendant and audiotex system with the flexibility to offer the caller various
choices (dial and extension, talk to an operator, etc.) and provides
menu-selected information. Another product, DART(RM), offers automated
attendant features in a single line, low cost system.
European Distributorship Operations. Dacon Electronics Plc., based in
Hertfordshire, England, distributes call management and other voice processing
products, including products manufactured by the Company, in Europe.
(ii) Status of publicly announced new products or industry segments
requiring material investment. Inapplicable.
(iii) The Company has adequate sources for obtaining raw materials,
components and supplies to meet production requirements and did not
experience difficulty during 1996 in obtaining such materials and components;
however, the components for the Company's older products, such as the McIAS
2100, have become more difficult or impossible to obtain. These products have
been replaced with the current McIAS 16xx series products.
(iv) The Company relies on technological expertise, responsiveness
to users' needs and innovations and believes that these are of greater
significance in its industry than patent protection. There can be no
assurance that patents owned or controlled by others will not be encountered
and asserted against the Company's voice processing products or that licenses
or other rights under such patents would be available, if needed. The Company
has registered trademarks and names which the Company considers important in
promoting the business of the Company and its products.
(v) Seasonality. Inapplicable.
(vi) The discussion of liquidity and sources of capital as set
forth in Management's Discussion and Analysis of Financial Condition and
Results of Operations is included in Item 7 of this Annual Report on Form 10-K
and is incorporated herein by reference.
(vii) In 1996, revenues included sales of $4.0 million to Northern
Telecom, Inc. and sales of $2.4 million to GTE Corp. The Company's U.K.
operation had sales of $5.4 million to British Telecommunications Plc in
1996. Over the past several years, a major portion of the revenues of the
domestic operations have come from two large customers, and substantially all
of the revenues of the UK operation come from one customer. Accordingly, the
loss of any of these customers could have a material adverse impact on the
Company's results of operations.
(viii) The dollar amount of orders believed by the Company to be
firm as of December 31, 1996 and 1995, amounted to $2.0 million and $1.4
million, respectively. Substantially all of the orders as of December 31,
1996, can reasonably be expected to be filled during 1997.
(ix) Business subject to renegotiation. Inapplicable.
(x) The Company competes, and expects to compete, in fields noted
for rapid technological advances and the frequent introduction of new
products and services. The Company's products are similar to those
manufactured, or capable of being manufactured, by a number of companies, some
of which are well-established corporations with financial, personnel and
technical resources substantially larger than those of the Company. The
Company's ability to compete in the future depends on its ability to maintain
the technological and performance advantages of its current products and to
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introduce new products and applications that achieve market acceptance. Future
research and development expenditures will be based, in part, on future
results of operations. There are no assurances that the Company will be able
to successfully develop and market new products and applications.
(xi) Expenditures for research and development activities of
continuing operations, as determined in accordance with generally accepted
accounting principles, amounted to $1.6 million in 1996 and $1.5 million in
1995 and 1994. In addition, the estimated dollar amount spent on the
improvement of existing products or techniques and customer-sponsored research
activities relating to the development of new products and techniques was $.1
million in each of the years 1996, 1995 and 1994.
(xii) Material effects of compliance with Federal, State or local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. Inapplicable.
(xiii) At December 31, 1996, the Company and its subsidiaries
employed 85 people.
(d) Sales to foreign customers primarily represent sales of Dacon
Electronics Plc. (incorporated in the United Kingdom) of $7.3 million in
1996, $7.5 million in 1995 and $4.8 million in 1994. Additional information
about foreign operations is included in Note L to Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K and is
incorporated herein by reference.
Further, there were export-type sales (primarily North America) of
approximately $.1 million in 1996 and 1995 and $.2 million in 1994. Export
sales do not involve any greater business risks than do sales to domestic
customers and, in certain instances, the Company obtains an irrevocable letter
of credit or payment prior to shipment of products to the customer. Selling
prices and gross profit margins on export-type sales are comparable to sales
to domestic customers.
Item 2. Properties
The facilities of the Company and its subsidiaries are located as
follows:
Lease
Square Expiration
Location Description Feet Date
Danbury, Connecticut: Office, engineering, production 40,000 10/31/03
3 Corporate Drive and service facility
Hemel Hempstead Office, distribution
Hertfordshire, and service facility 12,000 7/31/01
United Kingdom
1 Enterprise Way
The company considers each of these facilities to be in good condition
and adequate for the company's business.
Item 3. Legal Proceedings
In 1993, purported class action lawsuits were filed against the Company
and certain of its officers as follows:
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1. Michael Germano v. Cognitronics Corporation and Matthew J. Flanigan
in the United States District Court, District of Connecticut, dated March 15,
1993;
2. Barry L. Bragger and Eve Gerber vs. Matthew J. Flanigan and
Cognitronics, Inc. in the United States District Court, District of
Connecticut dated March 16, 1993; and
3. John M. Mitnick, on behalf of himself and all other similarly
situated v. Cognitronics Corp., Matthew J. Flanigan and G. Sullivan in the
United States District Court for the Northern District of Georgia, Atlanta
Division, dated March 15, 1993.
These actions were consolidated in the United States District Court in
Connecticut and a consolidated amended complaint was filed on July 8, 1993.
The consolidated lawsuit alleges securities law violations in connection with
the purchase of the Company's common stock by members of the purported classes
during the period from October 29, 1992 through March 12, 1993. The plaintiffs
seek unspecified damages and related costs. On July 28, 1993, the Company and
the other defendants filed a motion to dismiss the consolidated amended
complaint. After briefing by the parties, the motion was submitted to the
Court in October 1993 and since that time has been sub judice. On July 28,
1993, defendants moved to stay discovery pending resolution of defendants'
motion to dismiss. On October 7, 1994, the Court denied that motion. Since
that time the parties have engaged in limited discovery. The Company has
denied any wrongdoing and believes it has presented viable grounds to support
the motion to dismiss. Management has not made provision for liability, if
any, in the financial statements of the Company which may result from this
litigation.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
7
Executive Officers of the Company
The executive officers of the Company, their positions with the Company and
ages as of March 1, 1997 are as follows:
Name Position(s) and Office(s) Age
Brian J. Kelley President and Chief Executive Officer; 45
Director
Kenneth G. Brix Vice President 50
Harold F. Mayer Secretary 67
Michael N. Keefe Vice President 41
Roy A. Strutt Vice President; Director 40
Garrett Sullivan Treasurer and Chief Financial Officer 51
Emmanuel A. Zizzo Vice President 56
No family relationships exist between the executive officers of the
Company. Each of the executive officers was elected to serve until the next
annual meeting of the Board of Directors or until his successor shall have
been elected and qualified.
Mr. Kelley has been President and Chief Executive Officer of the Company
since January 1994. Prior to that he was Executive Vice President of
TIE/Communications, Inc. from 1991 to 1994 with responsibility for business
development, acquisitions and product management, President of CTG Inc., a
subsidiary of TIE/Canada, Inc., from 1990 to 1991 and President of TIE
National Accounts, Inc., a subsidiary of TIE/Communications, Inc., from 1986
to 1990.
Mr. Brix has been a Vice President of the Company since March 1994 with
responsibility for U.S. sales and marketing. Prior to that he was Director of
Sales and Marketing of Syntellect Network Systems, Inc. from December 1993 to
March 1994, Regional Vice President of Voicetek Corp. from 1990 to 1993 and
President of Voicecom Associates, Inc. from 1987 to 1990.
Mr. Mayer has been Secretary of the Company since 1975. He was Treasurer
from 1974 to 1989 and a Vice President of the Company from 1986 to 1996.
Mr. Keefe has been a Vice President of the Company since 1993 with
responsibility for engineering, prior to which he was Manager of Software
Planning and Development from 1992 until 1993 and senior engineer for more
than five years. He has been employed by the Company since 1980.
Mr. Strutt has been a Vice President of the Company since July 1994 with
responsibility for European operations. Since 1992, he has been Managing
Director of Dacon Electronics Plc, which was acquired by the Company in
November 1992, and Director of Sales and Operations from 1990 to 1992. Prior
to that he was Managing Director of Automatic Answering Ltd. for four years.
Mr. Sullivan has been Treasurer and Chief Financial Officer of the
Company since 1989. Prior to that he was Treasurer and Chief Financial Officer
of Fundsnet, Inc., an electronic funds transfer company, from 1986 until 1989.
He was employed by The Singer Co. from 1977 to 1986, where his most recent
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position was Vice President-Finance, Asia Division.
Mr. Zizzo has been a Vice President of the Company since March 1995 with
responsibility for operations, primarily manufacturing, purchasing and
physical facilities, prior to which he had been Director of Operations since
May 1994. He was an independent consultant from 1993 to April 1994. Prior to
that he was a Vice President of TIE/Communications, Inc. from 1991 to 1992, a
Vice President of CTG Inc., a subsidiary of TIE/Canada, Inc., from 1990 to
1991 and Director of Customer Support Services of TIE/Communications, Inc. for
more than five years.
9
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
(a) and (b) Cognitronics' stock is traded on the American Stock Exchange
under the symbol CGN. On March 1, 1997, there were 994 shareholders of
record. Information on quarterly stock prices is set forth in Item 8 of this
Annual Report on this Form 10-K and is incorporated herein by reference.
(c) The Company has never paid a cash dividend on its Common Stock and
has used its cash for the development of its business. The Company has no
present intention of paying a cash dividend, and payment of any future
dividends will depend upon the Company's earnings, financial condition and
other relevant factors.
Item 6. Selected Financial Data
Year ended December 31,
(in thousands except per share data)
- -------------------------------------------------------------------------------
OPERATING RESULTS 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
Revenues $17,343 $17,485 $14,576 $16,417 $16,178
Income (loss) from continuing
operations 1,099 1,321 (297) (1,942) 1,915
Income (loss) from discontinued
operations (386) (277)
Cumulative effect of accounting
changes (471)
Net income (loss) 1,099 1,321 (297) (2,799) 1,638
Income (loss) per share:
Continuing operations $.31 $.39 ($.09) ($.60) $.59
Discontinued operations (.12) (.08)
Cumulative effect of accounting changes (.15)
Net income (loss) .31 .39 (.09) (.87) .51
Weighted average number of common
shares outstanding 3,585 3,424 3,144 3,206 3,240
- -------------------------------------------------------------------------------
FINANCIAL POSITION
- ------------------------------------------------------------------------------
Working capital $ 8,745 $ 7,374 $ 4,956 $ 2,726 $ 6,664
Total assets 17,511 15,040 14,180 15,449 16,670
Common stock subject to repurchase 1,250 1,250 1,400
Stockholders' equity 10,612 9,044 7,042 7,193 10,698
Stockholders' equity per share $3.05 $2.63 $2.25 $2.37 $3.42
Cash dividends paid None None None None None
- -------------------------------------------------------------------------------
On November 13, 1992, the Company acquired all the outstanding stock of Dacon
Electronics Plc in a purchase transaction.
The above Selected Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
and the unaudited quarterly financial data included in Item 8 of this Annual
Report on Form 10-K.
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company reported net income of $1.1 million and $1.3 million for 1996
and 1995, respectively, versus a net loss of $.3 million in 1994.
In 1996, sales decreased $.2 million (1%) to $17.3 million from $17.5
million in 1995 primarily due to lower sales of the Company's UK
distributorship operations. Sales of the Company's domestic operations, which
for the first nine months of 1996 were down $.9 million from the comparable
period of 1995, were essentially unchanged from the prior year due to a strong
performance in the fourth quarter of 1996. The Company's backlog at December
31, 1996 was $2.0 million versus $1.4 million at December 31, 1995, primarily
due to the strengthening of the Company's domestic operations. The Company's
domestic operations is experiencing an increased demand for its products due
to the changing landscape of the telecommunications industry as new entrants,
such as competitive access providers and competitive local exchange carriers,
purchase equipment. The Company anticipates that the domestic operations will
continue this momentum into 1997. During 1996, the Company completed the
changeover from its older product lines (McIAS 2100s, 1100s and 1500s) to the
McIAS 16xx family of products. Gross margin percentages for 1996 were
comparable to 1995. A major portion of the Company's domestic revenues comes
from two customers, and substantially all of its U.K. distributorship revenues
come from one customer. The loss of any of these customers would have a
material adverse impact on the Company.
In 1995, sales increased $2.9 million (20%) to $17.5 million from $14.6
million in 1994, primarily due to increased sales of $2.7 million in its UK
distributorship operations. Sales of domestic operations increased $.2
million due to sales of McIAS upgrade kits ($2 million) and higher volumes of
McIAS 16xxs and 2100s substantially offset by lower sales of McIAS 1100s and
1500s. Gross margins increased $2.4 million (35%) to $9.2 million in 1995
from $6.8 million in 1994. Gross margins of the UK distributorship operations
increased $1.8 million due to higher volume and improved product mix; the
domestic operations gross margin increased $.9 million due to improved product
mix and lower costs.
In 1996, research and development increased $.1 million (9%) primarily
due to expenses related to certification testing of McIAS 950 and McIAS 16xx
products and higher personnel expenses. Such certification testing will
continue into 1997. In 1995, research and development expense was comparable
to the prior year.
In 1996, selling , general and administrative costs increased $.4 million
(8%) to $5.4 million from $5.0 million in 1995 primarily due to increased
expenses in the Company's UK distributorship operations related to the
relocation to new facilities and increased personnel. These expenses were
incurred in preparation of expanding the product line; however, these new
products have yet to make a significant contribution to the results of
operations. Selling, general and administrative costs decreased $.1 million
(2%) in 1995 due to a decrease of $.5 million in the domestic operations,
attributable to lower personnel costs offset by a $.4 million increase in the
UK distributorship operations primarily attributable to higher personnel
costs.
Other income, net, was $.1 million in 1996 versus expense of $.1 million
in 1995 (see Note H to the Consolidated Financial statements).
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The provision for income taxes is discussed in Note G to the Consolidated
Financial Statements. Under Financial Accounting Standards Board ("FASB")
Statement No. 109, the Company has recognized future tax benefits that
management believes will be realized. In order to realize these benefits, the
Company, exclusive of the results of Dacon Electronics Plc, will have to
generate pretax income of $3.9 million. The current deferred tax benefit of
$.6 million is primarily attributable to inventory provisions and the
recognition of such loss, for tax purposes, is, in large measure, within the
control of the Company. The non-current tax benefit, $.8 million, primarily
relates to deferred compensation and benefit plans and, as such, would be
recognized over a long period of time. The Company's U.S. pretax income (loss)
from continuing operations was $.8 million, $1.0 million and $(.3) million in
1996, 1995 and 1994, respectively. In 1994, the benefit of cost reduction
programs initiated in 1993 and 1994 were not fully realized and also reflect a
decline in the demand for the Company's McIAS 2100 series of products. The
Company anticipates additional revenue contributions from the growing
acceptance of the McIAS 16xx family of products. Based on this, management
anticipates that the Company will generate sufficient taxable income in the
future to realize these benefits.
The effect of inflation has not had a major impact on the operating
results of the Company over the past few years. However, technological
advances and productivity improvements are continually being applied to reduce
costs, thus reducing inflationary pressures on the operating results of the
Company.
Liquidity and Sources of Capital
Net cash flow from operations was $1.2 million, $2.3 million and $.9
million in 1996, 1995 and 1994, respectively.
Working capital increased to $8.7 million at December 31, 1996 from $7.4
million at December 31, 1995 and $5.0 million at December 31, 1994. The ratio
of current assets to current liabilities was 3.1:1 at December 31, 1996 versus
3.3:1 at December 31, 1995 and 2.2:1 at December 31, 1994. The decrease in
1996 is primarily due to the buildup of inventory at the end of 1996.
The Company anticipates making capital expenditures of approximately $.5
million and incurring increased research and development expenditures in
1997. Management believes that the cash and cash equivalents at December 31,
1996 and the cash flow from operations in 1997 will be sufficient to meet its
needs.
In 1993, a purported consolidated class action lawsuit was filed against
the Company and certain of its officers (see Note K to the Consolidated
Financial Statements and Item 3 - Legal Proceedings). Due to the
uncertainties involved in litigation, the ultimate outcome cannot be
determined at this time. If adversely determined, the resolution of this
matter could have a material negative affect on the Company's financial
condition, results of operations and cash flows.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the Securities
and Exchange Commission (including this Form 10K) may contain statements which
are not historical facts, so-called "forward-looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
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future results may differ significantly from those stated in any
forward-looking statements. Forward-looking statements involve a number of
risks and uncertainties, including, but not limited to, product demand,
pricing, market acceptance, litigation, risk of dependence on significant
customers, third party suppliers and intellectual property rights, risks in
product and technology development and other risk factors detailed in this
Annual Report on Form 10-K and in the Company's other Securities and Exchange
Commission filings.
Item 8. Financial Statements and Supplementary Data
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share amounts)
1996 First Second Third Fourth
Sales $3,765 $5,051 $3,720 $4,807
Gross profit 1,790 2,685 1,989 2,652
Net income 108 430 128 433
Net income per share $.03 $.12 $ .04 $.12
Common Stock price range:
High $6-13/16 $5-1/2 $5 $4-13/16
Low 3-3/4 3-7/8 3-3/8 3-3/16
1995 First Second Third Fourth
Sales $4,388 $5,010 $4,038 $4,049
Gross profit 2,270 2,693 2,163 2,033
Net income 252 410 344 315
Net income per share $.08 $.12 $.10 $.09
Common Stock price range:
High $3-1/2 $4-3/4 $6-3/8 $7-1/4
Low 2-1/8 2-1/2 3-1/16 4-3/8
The above financial information should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
13
Report of Independent Auditors
Stockholders and Board of Directors
Cognitronics Corporation
We have audited the accompanying consolidated balance sheets of Cognitronics
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cognitronics
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 10, 1997
14
CONSOLIDATED BALANCE SHEETS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
December 31,
1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,169 $ 3,668
Accounts receivable, less allowances of $103 and $83 3,624 2,832
Inventories 3,877 2,983
Deferred income taxes 625 500
Other current assets 587 601
------- -------
TOTAL CURRENT ASSETS 12,882 10,584
PROPERTY, PLANT AND EQUIPMENT, net 1,701 1,275
GOODWILL, less amortization of $1,396 and $1,064 1,981 2,313
DEFERRED INCOME TAXES 822 808
OTHER ASSETS 125 60
------- -------
$17,511 $15,040
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 78
Accounts payable $ 1,700 705
Accrued compensation and benefits 748 769
Income taxes payable 772 786
Other accrued expenses 917 872
------- -------
TOTAL CURRENT LIABILITIES 4,137 3,210
LONG-TERM DEBT 379 350
OTHER NON-CURRENT LIABILITIES 2,383 2,436
COMMITMENTS AND CONTINGENCIES (Notes I and K)
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a share; authorized
10,000,000 shares; issued 3,475,573 and
3,437,936 shares 695 687
Additional paid-in capital 12,250 12,146
Accumulated deficit (2,354) (3,453)
Currency translation adjustment 177 (71)
Unearned compensation (156) (265)
------- -------
TOTAL STOCKHOLDERS' EQUITY 10,612 9,044
------- -------
$17,511 $15,040
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands except per share data)
Year ended December 31,
1996 1995 1994
---- ---- ----
SALES $17,343 $17,485 $14,576
COSTS AND EXPENSES
Cost of products sold 8,227 8,326 7,806
Research and development 1,600 1,472 1,523
Selling, general and administrative 5,394 4,990 5,083
Amortization of goodwill 332 333 332
Other (income) expense, net (80) 129 17
------- ------- -------
15,473 15,250 14,761
------- ------- -------
Income (loss) before income taxes 1,870 2,235 (185)
PROVISION FOR INCOME TAXES 771 914 112
------- ------- -------
NET INCOME (LOSS) $ 1,099 $ 1,321 $ (297)
======= ======= =======
INCOME (LOSS) PER SHARE: $.31 $.39 $(.09)
==== ==== =====
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1994, 1995 and 1996
(dollars in thousands)
Common Stock Additional Accumu- Currency Unearned Treasury
Shares Paid-In lated Transla- Compensa- Shares
Outstanding Amount Capital Deficit tion tion Amount
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 3,031,550 $633 $11,839 $(4,477) $(31) $ 0 $(771)
Shares issued to management as
compensation 100,000 (416) 579
Effect of exchange rate (17)
Net loss (297)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 3,131,550 633 11,423 (4,774) (48) 0 (192)
Shares issued to Dacon shareholders 106,383 21 189
Warrants issued to Dacon
shareholders 35
Shares issued pursuant to
employee stock plans 198,568 33 495 (265) 192
Shares issued to Directors
as compensation 1,435 4
Effect of exchange rate (23)
Net Income 1,321
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,437,936 687 12,146 (3,453) (71) (265) 0
Shares issued pursuant to
employee stock plans 37,637 8 104 109
Effect of exchange rate 248
Net Income 1,099
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,475,573 $695 $12,250 $(2,354) $177 $(156) $ 0
=======================================================================================================================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands) Year ended December 31,
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) $1,099 $1,321 $ (297)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Income tax expense 771 914 112
Depreciation and amortization 690 684 709
Loss on disposition of assets 62 21 27
Shares issued as compensation 109 198 163
Net (increase) decrease in:
Accounts receivable (667) (546) (133)
Inventories (741) (311) 315
Other assets 15 150 650
Net increase (decrease) in:
Accounts payable 904 (337) (364)
Accrued compensation and benefits (78) 121 (817)
Other accrued expenses (19) 195 49
------ ------ ------
2,145 2,410 414
Income taxes (paid) refunded (974) (80) 522
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,171 2,330 936
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from disposition of assets 24 26 31
Additions to property, plant and equipment (846) (286) (284)
Acquisition of Dacon, net of cash acquired (77)
------ ------ ------
NET CASH USED BY INVESTING ACTIVITIES (822) (260) (330)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Shares subject to repurchase pursuant to the
Dacon acquisition (500)
Principal payments on debt (213) (1,715) (952)
Issuance of debt 192 725 952
Purchase of short-term investments (1,600)
Proceeds from sale of short-term investments 1,600
Shares issued pursuant to employee stock plans 93 165
Proceeds from sale of note receivable 1,893
------ ------ ------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 72 (1,325) 1,893
- -------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE DIFFERENCES 80 (17) 5
- ------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 501 728 2,504
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,668 2,940 436
------ ------ ------
CASH AND CASH EQUIVALENTS - END OF YEAR $4,169 $3,668 $2,940
==============================================================================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COGNITRONICS CORPORATION AND SUBSIDIARIES
Note A. Summary of Significant Accounting Policies
Organization. The Company designs, manufactures and markets voice processing
products in the United States and, through a subsidiary, distributes call
management and voice processing equipment in Europe.
Risks and Uncertainties. A major portion of the Company's domestic revenues
is generated by sales to two customers, and substantially all of its European
distributorship revenue comes from one customer. The loss of any of these
customers would have a material adverse impact on the Company. The Company's
receivables are primarily from major, well-established companies in the
telecommunications industry, and at December 31, 1996, three such companies
accounted for 65 % of the accounts receivable. The Company's markets are
subject to rapid technological change and frequent introduction of new
products. The Company's products are similar to those manufactured, or capable
of being manufactured, by a number of companies, some of which are
well-established corporations with financial, personnel and technical
resources substantially larger than those of the Company. The Company's
ability to compete in the future depends on its ability to maintain the
technological and performance advantages of its current products and to
introduce new products and applications that achieve market acceptance.
Principles of Consolidation. The financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly-owned. Intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Fair Value of Financial Instruments. The carrying amounts of the Company's
financial instruments (trade receivables/payables and other short-term and
long-term debt) approximate fair value.
Cash and Cash Equivalents. The Company considers financial instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. At December 31, 1996, essentially all of the Company's cash and
cash equivalent balances were with three financial institutions.
Inventories. Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment. Property, plant and equipment is carried at
cost less allowances for depreciation, computed in accordance with the
straight-line method based on estimated useful lives.
Foreign Exchange. Results of operations for the Company's foreign subsidiary
were translated into U.S. dollars using average exchange rates during the
period, while assets and liabilities were translated using current rates at
the end of the period.
Stock Based Compensation. The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value at the
date of grant. The Company accounts for stock option grants in accordance
18
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and therefore recognizes no compensation expense
for stock options granted. In 1996, the Company adopted the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" (see Note J).
Income (Loss) Per Share. Income (loss) per share are based on the weighted
average number of common and dilutive common equivalent shares outstanding
during the year as follows: 3,585,269 in 1996, 3,423,688 in 1995 and
3,144,183 in 1994. Fully diluted income per share did not differ
significantly from primary income per share in any year.
Goodwill. The Company has classified as goodwill the cost in excess of fair
value of the net assets of companies acquired in purchase transactions.
Goodwill is amortized using the straight-line method over its estimated useful
life (10 years). Goodwill in excess of associated expected operating cash
flows is considered to be impaired and is written down to fair value.
Note B. Valuation and Qualifying Accounts
The allowance for doubtful accounts was increased by $35,000, $84,000 and
$67,000 in 1996, 1995 and 1994, respectively, by charges to cost and expense.
In 1995, the Company reclassified an allowance of $169,000, together with the
related receivables to other assets. In 1996, the company wrote off
uncollectible accounts, net of recoveries, of $15,000.
Note C. Inventories (in thousands):
1996 1995
---- ----
Finished and in process $2,682 $2,012
Materials and purchased parts 1,195 971
------ ------
$3,877 $2,983
====== ======
Note D. Property, Plant and Equipment (in thousands):
1996 1995
---- ----
Building $ 425 $ 383
Machinery and equipment 1,230 1,066
Furniture and fixtures 1,694 1,172
------ ------
3,349 2,621
Less allowances for depreciation 1,648 1,346
------ ------
$1,701 $1,275
====== ======
19
Note E. Other Non-current Liabilities (in thousands):
1996 1995
---- ----
Accrued officers' supplemental pension plan expense $ 702 $ 738
Accrued deferred compensation 332 335
Accrued pension expense 713 776
Accrued postretirement benefit liability 813 798
------ ------
2,560 2,647
Less current portion 177 211
------ ------
$2,383 $2,436
====== ======
Note F. Debt and Credit Arrangements
At December 31, 1995, the Company had a note payable from an installment
finance agreement, bearing interest at 6.5% with a balance of $78,000.
The Company has a $1,000,000 line of credit maturing in September, 1997.
Borrowings under this arrangement are subject to various financial covenants,
are due on demand, are based on the amount of eligible accounts receivable, as
defined, bear interest at the prime rate plus 1% and are secured by
substantially all of the Company's assets. In 1996, no amounts were borrowed
under this line of credit. Prior to September 1995, the Company had a line of
credit with a financial services company. In addition, in connection with the
shares subject to repurchase, the Company, in 1995, issued notes aggregating
$750,000, which were repaid in 1995. The average outstanding balance of these
borrowings was $615,000 for 1995, and the weighted average interest rate was
13.0%.
Dacon Electronics Plc has a bank line of credit of $170,000 expiring in 1997.
During 1996 and 1995, no amounts were borrowed under this facility.
Long term debt (in thousands):
1996 1995
---- ----
Mortgage note, interest at 12% per annum $267 $269
Installment finance agreements, interest at 10% to 12%
per annum expiring through 2001 198 157
---- ----
465 426
Less current portion, included in other accrued expenses 86 76
---- ----
$379 $350
==== ====
The mortgage note is secured by Dacon Electronics Plc's land and building (net
book value $400,000 at December 31, 1996), and is payable over fourteen
years. Approximately $14,000 is due in each of the five years ending December
31, 2001.
Payments on the installment finance agreements in each of the five years in
the period ending December 31, 2001 are $72,000, $61,000, $36,000, $19,000 and
$10,000, respectively.
Interest of $63,000, $141,000 and $127,000 was paid in 1996, 1995 and 1994,
respectively.
20
Note G. Income Taxes
At December 31, 1996, the consolidated accumulated deficit included
approximately $1.5 million of retained earnings applicable to Dacon
Electronics Plc, a foreign subsidiary. If the undistributed earnings were
remitted, any resulting federal tax would be substantially reduced by foreign
tax credits.
The components of the provision (benefit) for income taxes for the years ended
December 31 are as follows (in thousands):
1996 1995 1994
Continuing operations ---- ---- ----
Current:
Federal $359 $245 $(405)
Foreign 480 515 49
State 71 40 42
---- ---- -----
Total current 910 800 (314)
Deferred:
Federal (135) 97 308
Foreign 48
State (4) 17 70
---- ---- ----
Total deferred (139) 114 426
---- ---- ----
$771 $914 $112
==== ==== ====
Not reflected in the 1996 and 1995 tax provisions are $19,000 and $97,000,
respectively, of income tax benefits related to the exercise of stock
options; such amounts were credited to additional paid-in capital.
Domestic and foreign pretax income (loss) for the years ended December 31 are
as follows (in thousands):
1996 1995 1993
---- ---- ----
Domestic operations $ 815 $1,015 $(285)
Foreign Operations 1,055 1,220 100
------ ------ -----
$1,870 $2,235 $(185)
====== ====== =====
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1996 and
21
1995 are as follows (in thousands):
1996 1995
---- ----
Deferred tax liabilities
Tax over book depreciation $ 69 $ 61
Other 30
------ ------
Total deferred tax liabilities 69 91
------ ------
Deferred tax assets:
Inventory valuation 597 464
Accrued liabilities and employee benefits 417 402
Accrued deferred compensation 385 399
Other post-retirement benefits 309 298
Separate return federal operating loss carryforwards
expiring in 2008 and 2009 445 445
Other 9 47
------ ------
Total deferred tax assets 2,162 2,055
Valuation allowance (646) (656)
------ ------
1,516 1,399
------ ------
Net deferred tax assets $1,447 $1,308
====== ======
Valuation allowance at January 1 $(656) $(580)
Credited (charged) to tax expense 10 (76)
----- -----
Valuation allowance at December 31 $(646) $(656)
===== =====
A reconciliation of the statutory federal income tax rate to the effective tax
rate of income (loss) for the years ended December 31, are as follows:
1996 1995 1994
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% (34.0)%
State income taxes, net of federal tax benefit 2.4 1.7 40.0
Losses with no tax benefit 56.4
Utilization of foreign loss carryforwards (43.4)
Lower foreign tax rate (0.8) (0.5) (9.5)
Goodwill amortization 6.0 5.1 61.0
Other (0.4) .6 (10.0)
---- ---- ----
41.2% 40.9% 60.5%
==== ==== ====
22
Note H. Other (Income) Expense, Net (in thousands):
Year Ended December 31,
1996 1995 1994
---- ---- ----
Interest expense $ 82 $194 $151
Interest income (164) (70) (129)
Severance (75)
Curtailment of benefit plans 113
Foreign exchange gain 2 5 (43)
---- ---- ----
$(80) $129 $ 17
==== ==== ====
Note I. Commitments
Leases. Total rental expense amounted to $377,000 in 1996, $265,000 in 1995
and $269,000 in 1994. Future annual payments for long-term noncancellable
leases for each of the five years in the period ending December 31, 2001 are
approximately $442,000, $431,000, $381,000, $366,000 and $303,000,
respectively, and approximately $217,000 per year thereafter through the
year 2003.
Pension Plan. The Company and its domestic subsidiaries have a defined
benefit pension plan covering substantially all employees. The benefits are
based on years of service and the employee's compensation. The Company's
funding policy is to contribute amounts to the plan sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, plus such additional amounts as the Company may
determine to be appropriate from time to time. In 1994, the Company amended
the plan so that no additional service cost benefits would be earned
subsequent to June 30, 1994. With respect to this curtailment, the Company
recognized an expense of $210,000 in 1994. Also due to this modification of
the plan, the service cost-benefits earned was reduced from prior years in
1994 and was eliminated in 1995. In addition, the Projected Benefit Obligation
was reduced to an amount equal to the Accumulated Benefit Obligation resulting
in a reduction in the interest cost component of the net periodic pension
cost.
The components of net cost of the plan for the years ended December 31 are as
follows (in thousands):
1996 1995 1994
---- ---- ----
Service cost-benefits earned during the period $ 63
Interest cost on projected benefit obligation $103 $111 128
Actual return on plan assets (117) (199) 23
Net amortization and deferral 24 120 (77)
---- ---- ----
Net periodic pension cost 10 32 137
Effect of curtailment 210
---- ---- ----
Total pension cost $ 10 $ 32 $347
==== ==== ====
23
The following table sets forth the plan's funded status and the accrued
pension expense recognized in the Company's Consolidated Balance Sheets at
December 31 (in thousands):
1996 1995
Actuarial present value: ---- ----
Accumulated benefit obligation - Vested $1,390 $1,453
Non-vested 22 78
------ ------
$1,412 $1,531
Projected benefit obligation for service rendered to
date $1,412 $1,531
Plan assets at fair value 1,085 1,115
------ -------
Plan assets less than projected benefit obligation (327) (416)
Unrecognized net asset, less accumulated amortization of
$140 and $131 (41) (50)
Unrecognized net gain (345) (310)
------ ------
Accrued pension expense (included in other non-current
liabilities) $ (713) $ (776)
====== ======
The discount rate used in determining the projected benefit obligation was
7.25%, in 1996 and 1995. The expected long-term rate of return on plan assets
used in determining the net periodic pension cost was 7% for all years
presented.
The plan assets at December 31, 1996 and 1995 were principally invested in
corporate debt and equity securities.
401(k) Retirement Plan. The Company has a defined contribution plan covering
substantially all domestic employees. The Company's contribution is based upon
the participants' contributions. The expense was $32,000, $15,000 and $17,000
in 1996, 1995 and 1994, respectively.
Officers' Supplemental Pension Plan. The Company has an unfunded,
noncontributory defined benefit pension plan covering certain retired
officers. Benefits under the plan are the greater of a percentage of final
salary of qualified officers or an annual amount that, when combined with
other retirement plans of the Company, is equal to $44,000 per year. In 1994,
the Company curtailed the supplemental pension plan by limiting the benefits
to officers who retire by June 30, 1996, and recorded a curtailment expense of
$312,000, primarily reflecting the write-off of substantially all of the
unamortized prior service cost.
The components of net pension cost of the plan for the years ended December 31
are as follows (in thousands):
1996 1995 1994
---- ---- ----
Service cost-benefits earned during the period $ 15
Interest cost on projected benefit obligation $40 $40 46
Amortization of prior service cost 13 28
Amortization of actuarial gains (7) (9) (5)
Net periodic pension cost 33 44 84
Effect of curtailment 312
--- --- ----
Total pension cost $33 $44 $396
=== === ====
24
The following table sets forth the plan's status and the accrued pension
expense recognized in the Company's Consolidated Balance Sheets at December 31
(in thousands):
1996 1995
---- ----
Actuarial present value of vested accumulated benefit
obligation $577 $588
Unrecognized net gain 125 150
---- ----
Accrued pension expense (included in other non-current
liabilities) $702 $738
==== ====
The discount rate used in determining the projected benefit obligation in all
years was 7.25%. All participants are retired and receiving benefits under the
Plan and therefore future increases in compensation are not applicable.
Other Postretirement Benefit Plans. In addition to the Company's pension
plans, the Company has a contributory , unfunded defined benefit plan
providing certain health care benefits for retired domestic employees. Prior
to 1994, substantially all of the Company's employees became eligible if they
reached normal retirement age while working for the Company. The participants'
contributions are adjusted periodically and are based on age and length of
service at time of retirement. In 1994, the Company curtailed this benefit
plan, limiting benefits to eligible employees who retired prior to March 31,
1996. This modification has the effect of reducing in 1994 and eliminating in
future years the service cost component of the post retirement benefit costs.
The assumed rate of increase in the per capita cost of covered benefits was
8.4% decreasing to 6% after 9 years. Increasing the health care cost trend
rate by one percentage point each year would increase the accumulated
postretirement benefit obligation by $31,000 at December 31, 1996 and the
aggregate service and interest cost component of net periodic postretirement
benefit cost for 1996 by $2,000. The weighted average discount rate used in
determining the net periodic postretirement benefit cost and accumulated
benefit obligation was 7.0% for all periods presented.
The following sets forth the plan's status and accrued postretirement benefit
liability recognized in the Company's Consolidated Balance Sheets at December
31 (in thousands):
1996 1995
Actuarial present value of accumulated postretirement
benefit obligation: Retirees $618 $560
Active plan participants 58 239
---- ----
676 799
Unrecognized net gain (loss) 137 (1)
---- ----
Accrued postretirement benefit liability (included in
other non-current liabilities) $813 $798
==== ====
25
The components of postretirement benefit cost for the years ended December
31, are as follows (in thousands):
1996 1995 1994
---- ---- ----
Service cost $ 26
Interest cost $44 $52 67
Net amortization (6)
--- --- -----
Net periodic cost 38 52 93
Curtailment gain (409)
--- --- -----
Total plan cost (income) $38 $52 $(316)
=== === =====
Deferred Compensation. At December 31, 1996 and 1995, the liability relating
to a deferred compensation arrangement between the Company and a director and
former officer of the Company aggregated $332,000 and $335,000, respectively.
Note J Stock Plans
At December 31, 1996, the Company has reserved 518,949 shares of its common
stock for issuance to key employees under the 1990 Stock Option Plan. The plan
provides for the grant, at fair market value on the date of grant, of
nonqualified stock options and incentive stock options. Options generally
become exercisable in three equal annual installments on a cumulative basis
commencing six months from the date of grant and expire five years (maximum
ten years) after the date granted.
The Company also has the 1967 Employee Stock Purchase Plan under which 88,792
shares were reserved at December 31, 1996. The purchase price is 85% of the
fair market value of the stock on the date offered. Generally, rights to
purchase shares under this plan expire up to 27 months after the date of
grant.
Share information pertaining to these plans is as follows:
Option Purchase
Plan Plan
------- --------
Outstanding at January 1, 1994 267,045 17,794
Granted 482,250 49,160
Cancelled or expired (348,032) (20,167)
------- ------
Outstanding at December 31, 1994 401,263 46,787
Granted 37,500
Cancelled or expired (45,509) (7,385)
Exercised (40,322) (19,246)
------- ------
Outstanding at December 31, 1995 352,932 20,156
Granted 90,000 37,545
Cancelled or expired (2,168) (1,527)
Exercised (17,481) (20,156)
------- ------
Outstanding at December 31, 1996 423,283 36,018
======= ======
26
The exercise price for options granted during 1994 ranged from $2.75 to $4.56,
for options granted during 1995 ranged from $2.38 to $6.75 and was $3.63 for
options granted in 1996. The weighted average exercise price for the 423,283
options outstanding under the Option Plan is $2.95 with expiration dates
ranging from 1999 to 2001. Options were exercised under the Option Plan at
weighted average exercise prices of $2.80 and $2.70 in 1995 and 1996,
respectively. Shares exercisable under the Option Plan at December 31, 1994,
1995 and 1996 were 15,188, 132,693 and 224,237, respectively.
Rights were granted under the Purchase Plan at exercise prices of $2.34 and
$3.72 in 1994 and 1996, respectively. In 1995 and 1996, shares were exercised
under the Purchase Plan at a weighted average price of $2.34. The exercise
price for the 36,018 rights outstanding under the Purchase Plan is $3.72,
which rights expire September 30, 1997.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its stock option plans, and has adopted the disclosure-only
provisions of SFAS No. 123. If the Company had elected to recognize
compensation expense for the 1990 Stock Option Plan and the 1967 Stock
Purchase Plan based on the fair value at the grant date , consistent with the
method presented by SFAS No. 123, the pro forma net income and net income per
share would be as follows (in thousands except per share information):
1996 1995
---- ----
Net income As reported $1,099 $1,321
Pro forma $1,047 $1,303
Net income per share As reported $ .31 $ .39
Pro forma $ .29 $ .38
Because SFAS 123 method of accounting has only been applied to options granted
subsequent to December 31, 1994, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value for the Stock Option and Stock Purchase Plans was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rates of 5.8% and 5.1%; no dividend yields; volatility
factors of the expected market price of the Company's common stock of 0.64 in
both years; and a weighted-average expected life of the option of 4.2 years
for the Option Plan and 9 months for the Purchase Plan.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
In 1995, the Company adopted the Restricted Stock Plan, a time accelerated
restricted stock plan, under which 150,000 shares of its common stock were
reserved. The plan provides for the award of shares to key employees;
27
generally, the awards vest in five equal annual installments commencing two
years after the date of the award. Vesting may be accelerated based on the
achievement of certain financial performance goals. In 1995, 139,000 shares
were awarded under the plan, of which 41,700 became vested, and $198,000 of
compensation expense was recognized. In 1996, $109,000 of compensation
expense was recognized and at December 31, 1996, 11,000 shares were reserved
for issuance under the plan.
Pursuant to the February 1995 renegotiated terms with certain sellers of Dacon
Electronics Plc, the sellers were given warrants, expiring on December 14,
1998, to purchase 50,000 shares of common stock at $2.375 per share.
Note K. Contingencies
In 1993, a purported consolidated class action lawsuit was filed against the
Company and certain of its officers alleging securities law violations in
connection with the purchase of the Company's common stock by members of the
purported classes during the period from October 29, 1992 through March 12,
1993. The plaintiffs seek unspecified damages and related costs. The Company
and the other defendants submitted a motion to dismiss the consolidated
amended complaint. The Company has denied any wrongdoing and believes it has
presented viable grounds to support the motion to dismiss. The motion is sub
judice. Due to the uncertainties involved in litigation, the ultimate outcome
cannot be determined at this time, and no provision for any liability that may
result from this litigation, if any, has been made in the financial
statements. If adversely determined, the resolution of this matter could have
a material negative affect on the Company's financial condition, results of
operations and cash flows.
28
Note L. Operations by Industry Segment and Geographic Areas
The Company operates in one industry segment: voice processing products.
The Company operates in the United States and Europe (United Kingdom).
Information about the Company's operations by geographic area for the years
ended December 31, is as follows (in thousands):
1996 1995 1994
Net sales ---- ---- ----
United States:
Unaffiliated customers $10,051 $ 9,970 $ 9,785
Inter-company transfers 544 636 411
------- ------- -------
10,595 10,606 10,196
Europe 7,292 7,515 4,791
Eliminations (544) (636) (411)
------- ------- -------
$17,343 $17,485 $14,576
======= ======= =======
Operating profit
United States $ 1,977 $ 2,429 $ 1,009
Europe 1,067 1,256 237
Inter-company eliminations (58) (8)
------- ------- -------
2,986 3,685 1,238
General corporate expenses 1,196 1,321 1,444
Interest (income) expense, net (82) 124 22
Foreign exchange (gain) loss 2 5 (43)
Income (loss) before income taxes $ 1,870 $ 2,235 $ (185)
======= ======= =======
Identifiable assets
United States $10,774 $ 9,427 $ 9,353
Europe 6,790 5,642 4,856
Inter-company eliminations (53) (29) (29)
------- ------- -------
$17,511 $15,040 $14,180
======= ======= =======
Revenues include sales of $4.0 million, $3.5 million and $4.2 million in
1996, 1995 and 1994, respectively, to one major customer; sales of $2.4
million and $2.7 million in 1996 and 1995, respectively, to another customer;
sales of $1.0 million in 1994 to another customer; and foreign sales of $5.4
million, $5.5 million and $3.3 million in 1996, 1995 and 1994, respectively,
to another customer.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
1. (a) The identification of the directors of the Company as of
March 1, 1997 and persons nominated to become directors set forth under the
caption Information Concerning Nominees in the Proxy Statement for the annual
meeting of stockholders to be held on May 8, 1997 is incorporated herein by
reference.
(b) The identification of the executive officers of the Company
and their positions with the Company and ages as of March 1, 1997, is set
forth under the caption Executive Officers of the Company in Part I of this
Annual Report on Form 10-K.
2. The information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 set forth under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy Statement for the
annual meeting of stockholders to be held on May 8, 1997 is incorporated
herein by reference.
Item 11. Executive Compensation
The information on executive compensation set forth under the
caption Executive Compensation in the Proxy Statement for the annual meeting
of stockholders to be held on May 8, 1997 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) and (b) Security ownership of certain beneficial owners and
management set forth under the caption Security Ownership in the Proxy
Statement for the annual meeting of stockholders to be held on May 8, 1997 is
incorporated herein by reference.
(c) Changes in Control. None.
Item 13. Certain Relationships and Related Transactions
The information on certain relationships and related transactions
set forth under the caption Certain Relationships and Related Transactions in
the Proxy Statement for the annual meeting of stockholders to be held on May
8, 1997 is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (2) and (d) The response to this portion of Item 14 is
submitted as a separate section beginning on page 26 of this Annual Report on
Form 10-K.
(a)(3) and (c) The response to this portion of Item 14 is submitted as a
separate section beginning on page 27 of this Annual Report on Form 10-K.
(b) There were no reports filed on Form 8-K during the fourth quarter of
1996.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on March
27, 1997.
COGNITRONICS CORPORATION
Registrant
by /s/ Garrett Sullivan
Garrett Sullivan
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 1997.
Signature Title
Chief Executive Officer:
/s/ Brian J. Kelley President and Chief
Brian J. Kelley Executive Officer
Chief Financial and Accounting Officer:
/s/ Garrett Sullivan Treasurer
Garrett Sullivan
A Majority of the Board of Directors:
/s/ Edward S. Davis Director
Edward S. Davis
/s/ Jack Meehan Director
Jack Meehan
/s/ William A. Merritt Director
William A. Merritt
/s/ Timothy P. Murphy Director
Timothy P. Murphy
31
Form 10-K -- Item 14 (a) (1) and (2) and (d)
(a) (1) Financial Statements
The following financial statements of the Company are included in Item 8.
Financial Statements Covered by Report of Independent Auditors: Page
Report of Independent Auditors 13
Consolidated Balance Sheets, December 31, 1996 and December 31, 1995 14
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1996 15
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1996 15
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1996 16
Notes to Consolidated Financial Statements 17
(2) and (d) Financial Statement Schedules
Schedules for which provision is made in the applicable accounting regulation
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore, have been omitted.
32
Item 14(a)(3) and (c)
INDEX TO EXHIBITS
Exhibit
- -------
3.1 Certificate of Incorporation as filed on January 2, 1962 (Exhibit
3-1-A to Form S-1 Registration Statement No. 2-27439
and incorporated herein by reference).
3.2 Amendment, dated June 28, 1965 (Exhibit 3-1-B to Form S-1 Registration
Statement No. 2-27439 and incorporated herein by reference).
3.3 Amendment, dated October 3, 1966 (Exhibit 3-1-C to Form S-1 Registration
Statement No. 2-27439 and incorporated herein by reference).
3.4 Amendment, dated October 30, 1967 (Exhibit 3-1-D to Form S-1 Registration
Statement No. 2-27439 and incorporated herein by reference).
3.5 Amendment, dated July 27, 1981 (Exhibit 3.5 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1983 and incorporated herein by
reference).
3.6 Amendment, dated September 27, 1984 (Exhibit 3.6 to Annual Report on Form
10-K for the fiscal year ended December 31, 1984 and incorporated herein
by reference).
3.7 Amendment dated June 13, 1988 (Exhibit 3.7 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1988 and incorporated herein by
reference).
3.8 Amendment dated November 3, 1994 (Exhibit 3.8 to Annual Report on
Form 10-K for the year ended December 31, 1994 and incorporated herein by
reference).
3.9 By-laws of the Company (Exhibit 3.9 to Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference).
4. Specimen Certificate for Common Stock (Exhibit 4-1 to Form S-1
Registration Statement No. 2-27439 and incorporated herein by reference).
10.1 1990 Stock Option Plan, as amended (Exhibit 10.1 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994 and incorporated
herein by reference).
10.2 Lease, dated April 30, 1993, between Seymour R.Powers and The Danbury
Industrial Corporation, landlord, and Cognitronics Corporation, tenant
(Exhibit 10.3 to Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
10.3 Form of Indemnity Agreement, dated October 27, 1986, between each Director
(with equivalent form for each Officer) and Cognitronics Corporation
(Exhibit 10.7 to Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference).
10.4 Supplemental Pension Plan for Officers, as amended November 2, 1993
(Exhibit 10.6 to Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
10.5 1996 Executive Bonus Plan (attached as Exhibit 10.5 to this Annual Report
on Form 10-K).
33
Exhibit
- -------
10.6 Form of Warrant Agreement dated February 9, 1995 between Cognitronics
Corporation and each of the former shareholders (other than Inkel) of
Dacon Electronics Plc, granting warrants to purchase up to an aggregate of
50,000 shares of the Company's Common Stock (Exhibit 10.9 to Annual Report
on Form 10-K for the year ended December 31, 1994 and incorporated herein
by reference).
10.7 Cognitronics Corporation Restricted Stock Plan (Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1995 and incorporated herein by reference).
10.8 Revolving Loan Agreement between Cognitronics Corporation and People's
Bank dated September 8, 1995 (Exhibit 10.1 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 and incorporated herein
by reference).
22. List of subsidiaries of the Company as of December 31, 1996 (attached as
Exhibit 22 to this Annual Report on Form 10-K).
23. Consent of Independent Auditors, dated March 24, 1997 (attached as
Exhibit 23 to this Annual Report on Form 10-K).
27. Financial Data Schedule (attached as Exhibit 27 to this Annual Report on
Form 10-K).
Copies of the Exhibits to this Annual Report on Form 10-K are available
upon written request to the Secretary of the Company at 3 Corporate Drive,
Danbury, CT 06810-4130 and payment of $35.00 for a complete set of the
Exhibits or $.25 per page for any part thereof (minimum $5.00).